Showing A Loss In 2nd Year??

[My4SunshineGirlsNY]

Is it a red flag to show a loss in your second year of business? Last tax season I showed a gain of only a few hundred dollars after all my expenses (was my 1st year in business). I'm still working on entering my data into minute menu for this tax season, but last night I calculated what I had already entered in and I'm showing a few hundred in the loss and I'm not done entering in my receipts.

I had a lot less kids last year, but my utilities, mortgage interest, mileage, ect. is helping my deductions.

I just don't want to raise a red flag, should I be trying to reduce my deductions since I had less kids in care?

[kentster]

I think if you are reporting all of your expenses and income and using the right rules for tax purposes, the busines is what it is. Year over year many things can change the way the business performs. I would not go through and say "oh, I'll just remove some of these expenses to show a gain so I do not create a red flag". You know what I mean? I've always felt that in any audit, it does not necessarily mean that you will have to OWE more to Uncle Sam....sometimes, in the review of an audit, MORE expenses are captured and maybe you owe less or get more in return. The key is to make sure you adhere to the tax rules and keep the documentation that supports your entries. That's my two cents anyway.

[My4SunshineGirlsNY]

Thank you, I follow all the rules, I just don't want my return held up.

[Michael]

I think showing a loss for more then two years is a red flag. I will try to find the thread that Tom Copeland answered this question for.

[Michael]

Here it is from Tom's thread:

https://www.daycare.com/forum/showthread.php?t=26229

The IRS assumes you are a business trying to make a profit if you show a profit three out of every five years. If you don't do this you could attract some attention from the IRS. They may think that you are operating a hobby, not a business and deny some of your deductions. However, I've never seen an auditor actually say that a provider is running a hobby. However, they can deny deductions when you are showing a loss by saying you aren't trying to make a profit.

If you do show a loss you cannot claim house expenses (property taxes, mortgage interest, utilities, house insurance, house repairs, and house depreciation).

My advice would be that if you have been showing losses for a number of years try to reduce your expenses and show a smaller loss each year if possible.